Foreign Investment in Guangdong: New Incentives Announced

Guangdong province, China’s manufacturing heartland, has announced new measures to attract foreign investment.

On December 1, the Guangdong provincial government issued a report delineating 10 policies to expand the province’s openness to foreign investors and foreign capital.

The measures are in support of the State Council’s Measures to Expand Opening-up and Actively Utilize Foreign Investment (Guo Fa [2017] No. 5) and the Measures to Promote Foreign Capital Growth (Guo Fa [2017] No. 39). They include policies to improve Guangdong’s business environment, promote fair competition between foreign and domestic companies, expand market access, and offer investment incentives.

The 10 measures for relaxing foreign investment:

  1. Further expand market access, including relaxing ownership limits and/or operation scope in the following industries:
    • Special vehicle manufacturing;
    • New energy vehicle manufacturing;
    • Ship design;
    • Regional aircraft and general aircraft maintenance;
    • Human resources service agencies;
    • International maritime transport companies;
    • Railway passenger transport companies;
    • Construction and operation of gas stations;
    • Internet service and call centers;
    • Performance brokerages;
    • Brokerage, banking, securities, futures, and life insurance companies;
    • Law firms jointly owned by Hong Kong/Macau investors and domestic investors; and
    • Hong Kong/Macau airlines will be treated as special domestic airlines.
  2. Increase the use of financial incentives for foreign investment for the 2017-2022 period, including:
    • For new projects worth more than US$50 million, replenishment projects worth more than US$30 million, and for multinational or regional headquarters worth at least US$10 million, the provincial government will give financial bonuses worth no less than two percent of the year’s actual investment amount, capped at RMB 100 million (US$15.1 million).
    • For Fortune 500 companies and leading global companies with actual investments (new projects or replenishment projects) in manufacturing worth over US$100 million in one year, and newly established IAB (new generation of information, automatic equipment, and bio-pharmaceuticals) and NEM (new energy, new material) projects with actual investments of no less than US$30 million in one year, the provincial government will provide financial support on a case-by-case basis.
    • For multinational or regional headquarters that contribute over RMB 10 million (US$1.5 million) to provincial revenue, 30 percent of the contributions will be awarded to the company in a lump sum payment, capped at RMB 10 million (US$1.5 million).
    • Local governments can provide other financial incentives based on provincial incentive standards.
  3. Strengthen the use of land security, including land-use incentives for Fortune 500 companies, regional headquarters, and advanced factories.
  4. Support innovation and research & development (R&D), including financial support for foreign R&D institutions and encourage participation in the development of public service platforms.
  5. Increase financial support, particularly for Fortune 500 companies, global industry leaders, and cross-border mergers and acquisitions.
  6. Strengthen personnel support, including incentives and visa conveniences for high-level foreign talent.
  7. Strengthen the protection of intellectual property rights, including by accelerating the construction of the China (Guangdong) Intellectual Property Protection Center.
  8. Enhance the level of investment and trade facilitation, including the full implementation of the Negative List and access to national treatment.
  9. Optimize the environment for attracting foreign investment in key parks, including implementation of administrative streamlining in eligible development zones and other supportive policies.
  10. Improve the use of foreign investment guarantee mechanisms, including setting up a coordinated mechanism to coordinate and solve the key problems that prevent investment in Guangdong.

The measures represent a step forward in boosting Guangdong’s competitiveness in attracting foreign investment. Although Guangdong is China’s richest province by GDP, and already one of the most open to foreign investment, rising labor and land costs have seen many businesses relocate their manufacturing operations to lower cost alternatives, such as Western China, Vietnam, and India.

Some areas in Guangdong have been successful in upgrading their local economies beyond low-value manufacturing. Most notably, Shenzhen has emerged as a hub for innovation and high-tech startups, and also boasts a robust financial sector.

Guangzhou has also had success in moving up the value chain, by producing higher-end goods like automobiles and high-tech products, while surrounding cities like Foshanhave also benefited from regional integration and high-tech manufacturing.

The new measures reflect Guangdong’s continued desire to attract high quality capital-heavy investments; many of the policies specifically state a preference for Fortune 500 companies or recognizable industry leaders.

Stephen O’Regan, Senior International Business Advisory Associate at Dezan Shira & Associates in Guangzhou said, “These new regulations certainly show a more open approach by the Guangdong government towards foreign investment, particularly in trying to attract high level talent. However, many smaller companies still find it difficult to incorporate in China; the country is lowering entry barriers only for already strong enterprises.”

According to O’Regan, “The new policies show a step in the right direction, but overseas SMEs may still find it difficult to enter the south China market without more government support”. In this environment, local expertise proves valuable.

O’Regan noted that SMEs can still benefit from some of the new measures both directly and indirectly, as well as other regional incentives. He explained, “Many of Guangdong’s cities offer incentives and subsidies that foreign SMEs find attractive. The Guangdong government is ultimately paving the way for more foreign SME investment by making it easier to access incentives.”

 

Alexander Chipman Koty contributes to Editorial and Research operations for Asia Briefing in China.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

China’s Pollution Crackdown: How Severe is the expected Macro-Economic Impact?

China is undergoing an environmental paradigm shift, transitioning from the world’s top polluter to global leader in the fight against climate change. In recent months, China has dramatically strengthened the enforcement of its environmental regulations as it pursues its goal of promoting ‘ecological civilization’, and has inspected and fined countless businesses in the process.

Many areas in China suffer from severe levels of pollution, and the central government under the leadership of President Xi Jinping has initiated several crackdowns on heavily polluting industries that are non-compliant with current environmental regulations. These measures have affected business as usual in various sectors and have had rippling effects throughout the economy.

Measures taken by the government

The Ministry of Environmental Protection (MOEP) and the environmental bureau have adopted an intolerant stance against businesses flouting environmental laws over the last year, which is expected to cut air pollution levels in northern cities. Although predominantly targeting air pollution, the authorities are also stringently curbing other types of pollution, including water and soil pollution, in addition to scrutinizing waste management systems across the country.

It is important to note that although environmental laws have not been substantially altered recently, the enforcement of pre-existing laws has been tremendously increased. As enforcement of environmental laws has been historically lax in China, this sudden change in government policy has rattled the industry and made polluting businesses cautious.

In 2016, the government began conducting a series of investigations in heavy industries, and as a result, several non-compliant and illegal steel mills, coal mines, aluminum smelters, and other manufacturing units were shut down. To date, it is estimated that more than 80,000 factories have been shut down across the country by the anti-pollution drive. Other establishments caught infringing environmental regulations have been ordered to clean up their operations within a short time frame or risk closure by the inspection squad.

Penalties have been levied on around 40 percent of factories across the country as environmental inspectors have been dispatched to more than 30 regions in recent months. Inspectors have reportedly imposed hefty fines totaling over RMB 870 million (US$132.2 million) to date, and in some cases criminal liability on employers who are facing jail time for violating environmental regulations. Further, additional inspectors have been deployed to act as watchdogs and ensure that local inspectors are fulfilling their duties.

In addition, municipal authorities have filed a large number of environmental pollution cases in the past year. Beijing municipality alone has filed close to 13,000 cases against non-compliant polluters.

Rippling impact on business and economy

The sectors most severely impacted by the anti-pollution drive have been textiles, energy, heavy metals, coal and gas, mining, cement, paper, automobile, and consumer goods. The impact is also expected to shock international supply chains due to disruption in exports from China.

Inflation has spiked as firms cope with increasing costs of compliance with environmental regulations and adapt to clean energy. Increased production costs will ultimately have to be shouldered by the consumer, and the middle class will be particularly vulnerable to inflationary trends in consumer goods and electricity.

Financial and social stability has also been disrupted as more than 60,000 jobs have been lost as a result of factory shutdowns. Employers who are unable to repay debts have left their factories closed and unproductive.

In many manufacturing sectors, small-scale firms are closing down, as they are unable to compete with larger rivals due to financial incapacity to adapt to clean energy. As a result, the firms that manage to survive and adapt to the new environmental regulations and successfully switch to clean energy will significantly benefit in the medium run as they gain the market share previously held by smaller firms.

The shutting down of small and medium scale firms has also resulted in greater consolidation among surviving firms in many industries like iron and steel, resulting in a steep increase in global prices.

The business impact of the anti-pollution drive has been particularly harsh in the north as well as Beijing-Tianjin-Hebei region. It is expected that these measures may reduce GDP growth by up to two percent in the short run due to disruption in manufacturing and supply chains across industries coupled with increased costs of compliance and technological upgrading.

However, experts opine that the anti-pollution drive will have minimal macro-economic impact in the long run and, if successful, will have huge health benefits for the country’s 1.4 billion citizens. Pollution and related health and safety issues are consistently among the top concerns of Chinese people, and addressing these issues would also boost China’s international reputation as an authority in green technology and climate change leadership.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

China SOEs Bid On Philippines Clark International Airport Development

Four of the seven bidders on the design and development contract for the Clark Airforce base in the Philippines are Chinese State Owned Enterprises, according to the Philippines Bases Conversion and Development Authority (BCDA).  The China State Construction Engineering Corp Ltd, China Harbour Engineering Co Ltd and Sinohydro Corp Ltd have all submitted tenders.

Clark International Airport is north of Manila and previously served as an American Airforce base until the facility was closed in 1991. The Airport serves the Clark Freeport Zone, an important tax and duty incentivized area that aims to encourage investment in airport-driven urban facilities, targeting high-end IT, aviation and logistics related enterprises, tourism and other sectors. The area is connected to Manila by the Subic-Clark-Tarlac Expressway, which is in turn connected to the North Luzon Expressway, some 43km from Manila.

Chinese SOEs have been prominent in bidding on development contracts aligned with China’s Belt & Road Initiative, and has special encouragement to do so with the Philippines and ASEAN nations as China has both a Free Trade Agreement with ASEAN and a Double Tax Treaty with the Philippines, providing tax savings on the provision of certain products, services and manpower.

“It will be interesting to note, should a Chinese bid win, whether this will include Chinese labor” says Chris Devonshire-Ellis of Dezan Shira & Associates. “It is important that Philippines labor is deployed in development contracts in the Philippines”.

The contract is worth about US$250 million, meaning that opportunities will arise for subcontractors and materials suppliers familiar with airport and related constructions. The plan is to finish the Clark International Airport New Terminal Building by 2020, increasing Clark’s annual capacity from four million to twelve million passengers. This will give airlines an alternative to Ninoy Aquino International Airport (NAIA), which at the moment is the main international gateway to the Philippines, but suffers from congestion problems.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

 

India And Hong Kong Finalize Double Tax Avoidance Agreement After Years Of Negotiation

India and the Hong Kong Special Administrative Region (HKSAR) of China recently entered into a double tax avoidance agreement (DTAA). After years of negotiation, the bilateral DTAA was approved on November 10, 2017.

When it comes into force, the India-Hong Kong DTAA will hold important tax implications for international businesses operating in both countries. The agreement will also benefit trading companies that do not have a permanent presence in India but service to an India-based entity.

What is DTAA?

Non-resident Indians (NRIs) and foreign nationals doing business in India make profits in India as well as in other countries of operation. Such businesses often have to pay tax twice on the same source of earned income or profit in India.

As a general principle, international businesses in other countries are taxed on their territorial income, which is the income generated within the territory of that country. India, on the other hand, imposes a corporate income tax on the worldwide income of business enterprises that have a permanent presence in India. As a result, India-based multinational companies deriving income from other countries face double taxation on their earned income.

A DTAA creates a fair and certain tax environment for business activities carried out between two countries. It prevents international businesses from paying tax in the country where the income or profits are generated. Or, in some cases, it allows the country to deduct tax at source, and offers businesses a foreign tax credit to reflect that the tax has already been paid.

The methodology for double taxation avoidance, however, varies from country to country.

India’s DTAA with Hong Kong

India has over 86 DTAAs in force with various countries, which provide tax relief on transactions carried out between India and those countries. Each DTAA specifies the agreed rates of tax and the jurisdiction on the specified types of income involved.

The India-Hong Kong DTAA offers similar provisions. The DTAA will give protection against double taxation to over 1,500 Indian companies and businesses that have a presence in Hong Kong as well as to Hong Kong-based companies providing services in India. It will provide clarity to businesses regarding tax rates and tax jurisdictions, as they will now be taxed in only one of the signatory countries. This will allow investors to be more confident about their investment decisions.

Aside from tax relief, there are several other benefits that the India-Hong Kong DTAA will offer to the concerned businesses. These include:

  • Lower withholding tax (tax deducted at source or TDS) rates, which can be as high as 40 percent in the absence of a DTAA;
  • Lower dividend distribution tax (DDT), which is an additional tax levied on foreign investors besides the corporate income tax; and
  • In certain circumstances, credits for taxes paid on the double-taxed income that can be encashed at a later date.

Other details regarding the DTAA are yet to be announced.

Chris Devonshire-Elllis of Dezan Shira & Associates comments: “Hong Kong has a very well established Indian diaspora that has been there for decades and has much wealth and business influence within the territory. It is a very positive sign that the DTAA has been agreed as businesses in both India and Hong Kong have finally been given better financial incentives work together and increase trade and prosperity in both their respective areas”.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Investment Incentives in Vietnam’s Central Highlands Region

The Central Highlands have long been a strategic economic, political location in the history of Vietnam. Sharing borders with Laos and Cambodia, this region is one of the most important location for the economic development of Vietnam in the next few years.

A region full of potential

The Central Highlands, or the Western Highlands, is located in the West and South West of Vietnam. The region contains five provinces: Lâm Đồng, Daklak, Dak Nông, Gia lai and Kon Tum. These provinces are expected to show high potential for development in renewable energy, agricultural and tourism in the coming years.

According to the Minister of Public Security’s speech in the fourth conference on investment promotion in Central Highlands total investment capital has reached VND 266 trillion in 2015 with an annual growth rate of 11.3 percent between 2011 and 2015. To date, there have been 140 FDI projects worth US$772.5 million in the Central Highlands. This number is expected to grow significantly in the next few years, especially as the government is trying to improve the region’s infrastructure and paying more attention to renewable projects in its long-term plan of development.

Tourism and agriculture are two important sectors that appeared very promising to foreign investors, especially investors from Korean, Japan, and China. However, Central Highlands are not being fully explored, thus, bringing more opportunities for future investors to enter the race.

Opportunities for renewable energy projects

The Central Highlands is a prominent location for solar potential maps in Vietnam. According to Vietnamese authorities, the total hours of sun in Central Highlands varies from 2000 to 2600 hours per year. Korean Solar power investors in this area are upbeat on the prospects for the region and have published findings indicating a direct solar radiation generation of 5 kWh per square meter. With this in mind, Vietnam’s Central Highlands is an ideal place to develop a solar power plant.

In addition, the region’s wind power capacity could reach 2000MW, which is even more than the second largest hydro power plant of Vietnam in Hoa Binh.

Realizing the favorable conditions for developing renewable energy of this region, Central Highland provinces have issued a number of preferential mechanisms and policies as well as simplified administrative procedures, to attract investors. Daklak is topping the list with 4 projects worth US$3.3 billion from AES Corporation, Vietnam’s Xuan Thien Limited Company, South Korea’s Solar Park Limited and Vietnam’s Long Thanh Infrastructure Development and Investment Company.

Promising land for coffee, tea, and pepper

In addition to its advantages in solar and wind power, the region is also getting more and more popular as a promising land for FDI projects in agriculture. Central Highlands cover an area of 5.46 million ha, in which 2 million ha are used for developing agricultural. Besides, the region contains 74.25 percent of the red basalt soil of Vietnam, making it an ideal place for large-scale production specialized in coffee, pepper, tea, cashew, cassava, rubber.

Realizing the growth potential of this sector, investors from Korea and Japan have launched several projects with advanced agricultural techniques to maximize production in the region. New policies and tax incentives are also available to encourage and attract investments. Although climate changes may appear to be a threat, agriculture will continue to grow and strengthen its position as an important sector of Central Highland’s provinces.

Top destinations for tourism

Dalat, Kon-Tum and Gia Lai are famous destinations for eco-friendly and historical tourism. Cool weather, beautiful natural sight-seeing, historical museums and also the variety of food specialties are the reasons why more and more tourist chose these destinations for a get-away on the weekend. In 2016, Dalat city of Lam Dong province welcomed 5.4 million visitors, an increase of 6 percent compared to 2015. On top of this, the number of international visitors reached 270,000 people with most travelers coming from South Korea, China, Thailand and the United States.

The city also has been ranked by The New York Times as one of top 52 tourist destination in the world. Although the region’s tourism industry used to suffer from the past because of poor infrastructure and facilities, the situation is getting better recently thanks to investments from government also foreign investors. New tourist products with better services are now provided, making the region even more attractive to tourist. Besides, many investments in hotels, amusement park, restaurants are about to kick off in the near future, helping these provinces to fully exploit tourism potential of this region.

Conclusion

The Central Highlands contributes 9 percent of Vietnam’s GDP. Ignoring all the advantages it has developed in its economy, the region still remains poor compared to others. Foreign investment is limited in both quantity and quality. However, with new incentives and support from the government, the investment’s environment of Central Highlands becomes more and more attractive.

Beside many investment incentives such as corporate income tax exemption, land use rental reduction, import tax exemption, etc., FDI projects can benefit from province-specific investment support. For example, investment project in high-tech applied agricultural business can receive support from Kon Tum province for the development of greenhouses and net houses with a support level of VND 50,000 per square.

Each province in the region have different types of support and incentives to attract foreign direct investment, thus to maintain the sustainable growth of the region. In the future, Central Highlands will continue to consolidate its position as an important region in the economic development of the whole country.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

ASEAN’s Free Trade Agreements With The Asia-Pacific Region’s 5 Biggest Economies

Apart from the ASEAN Free Trade Area (AFTA) between ASEAN member states, the regional trade bloc has signed several FTAs with some of the major economies in the Asia-Pacific region. These include the ASEAN-Australia-New Zealand FTA (AANZFTA), the ASEAN-China FTA (ACFTA), the ASEAN-India FTA (AIFTA), the ASEAN-Korea FTA (AKFTA), and the ASEAN-Japan Comprehensive Economic Partnership (AJCEP). The aim of these FTAs is to encourage and promote businesses of all sizes in ASEAN to trade regionally as well as internationally without tariff barriers. Businesses with operations in ASEAN can use the FTAs to gain easy access to new export markets for their products at low costs, and benefit from simplified export and import procedures.

ASEAN-Australia-New Zealand Free Trade Area

The agreement establishing the ASEAN-Australia- New Zealand Free Trade Area (AANZFTA) entered into force in January 2010. The FTA is the most comprehensive agreement covering a wide range of issues including trade in goods and services, investment, intellectual property, competition as well as economic cooperation. Since its inception, the AANZFTA has encouraged trade in goods and services by removing barriers and reducing transaction costs for companies wanting to do business in member countries. According to the agreement, 99 percent of the Australia-New Zealand trade in goods with Indonesia, Malaysia, the Philippines, and Vietnam will be duty-free by 2020. Upon full implementation in 2025, almost all trade between the member countries will be free of tariff, helping businesses save millions of dollars in tariff duties each year.

ASEAN-China Free Trade Area

Over the past decade, trade and investment between ASEAN member states and China have expanded significantly under the ambit of the ASEAN China Free Trade Area (ACFTA). The Agreement on Trade in Goods was signed in 2004 and implemented in July 2005 by all the member countries. Under the agreement, the six original ASEAN members and China decided to eliminate tariffs on 90 percent of their products by 2010, while Cambodia, Lao PDR, Myanmar, and Vietnam – commonly known as CLMV countries, had until 2015 to do so. Since the signing of the agreement, China has consistently maintained its position as ASEAN’s largest trading partner. In 2015, ASEAN’s total merchandise trade with China reached US$346.5 billion, accounting for 15.2 percent of ASEAN’s total trade. Additionally, ASEAN received US$8.2 billion in foreign direct investment (FDI) from China in 2015, placing China as ASEAN’s fourth largest source of FDI. By 2020, ASEAN and China are committed to achieving a joint target of US$1 trillion in trade and US$150 billion in investment through ACFTA.

ASEAN-India Free Trade Area

The ASEAN-India Trade in Goods Agreement entered into force on January 1, 2010. The signing of the agreement paved the way for the creation of one of the world’s largest free trade area market, creating opportunities for over 1.9 billion people in ASEAN and India with a combined GDP of US$4.8 trillion. AIFTA creates a more liberal, facilitative market access, and investment regime among the member countries. The agreement set tariff liberalization of over 90 percent of products traded between the two dynamic regions. Accordingly, the tariffs on over 4,000 product lines were agreed to be eliminated by 2016, at the earliest.

ASEAN-Republic of Korea Free Trade Area

The ASEAN-Korea Trade in Goods Agreement was signed in 2006 and entered into force in 2007. It sets out the preferential trade arrangement in goods among the ASEAN Member States and South Korea, allowing 90 percent of the products being traded between ASEAN and Korea to enjoy duty-free treatment. The Agreement provides for progressive reduction and elimination of tariffs by each country on almost all products. Under the Trade in Goods Agreement, ASEAN-6 including Brunei Darussalam and Korea have eliminated more than 90 percent of tariffs by January 2010.

ASEAN-Japan Comprehensive Economic Partnership (AJCEP)

The ASEAN–Japan Comprehensive Economic Partnership (AJCEP) came into force in December 2008. The Agreement covers trade in goods, trade in services, investment, and economic cooperation. The FTA provides for the elimination of duties on 87 percent of all tariff lines and includes a dispute settlement mechanism. It also allows for back-to-back shipment of goods between member countries, third party invoicing of goods, and ASEAN cumulation. Both ASEAN and Japan have also initiated several economic cooperation projects that include capacity building and technical assistance in areas of mutual interest. These areas include intellectual property rights, trade related procedures, information and communications technology, human resources development, small and medium enterprises, tourism and hospitality, transportation and logistics, among others.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Preview: Vietnam’s New 2018-2023 FDI Strategy Shifts From Low-Cost Labor To High-Tech Industry

Vietnam’s Ministry of Planning and Investment, with the assistance of the World Bank, is currently drafting a new FDI strategy for 2018-2023 focusing on priority sectors and quality of investments, rather than quantity. The new draft aims to increase foreign investment in high-tech industries, rather than labor-intensive sectors. Manufacturing, services, agriculture, and travel are the four major sectors in focus in the draft.

Sectors in focus

The four major sectors in focus are:

  • Manufacturing – It includes high-grade metals, minerals, chemicals, electronic components, plastics and high-tech;
  • Services – Includes MRO (maintenance, repair, and overhaul) along with logistics;
  • Agriculture – Includes innovative agricultural products i.e. high-value products such as rice, coffee, seafood and;
  • Travel – High-value tourism services

Investment priority

The draft prioritizes FDI investments on a short-term and medium-term basis. In the short-term, industries with limited opportunities for competition will be prioritized.

Industries include:

  • Manufacturing/Production – Automotive and transport equipment OEMs and suppliers;

In the long-term, the emphasis is on sectors that focus on skills development, including:

  • Manufacturing – Manufacturing of pharmaceuticals and medical equipment;
  • Services – Services include education and health services, financial services, and financial technology (Fintech);
  • Information technology and intellectual services

The draft also includes recommendations about the further removal of entry-barriers and optimizing incentives for foreign investors such that their effect on the economy is maximized.

FDI in 2017

In the first 11 months of 2017, the total FDI capital including newly registered, additional funds and share purchase value reached US$ 33.09 billion, a year-on-year increase of 82.8 percent. FDI disbursed is expected to reach US$ 16 billion, an increase of 11.9 percent over the same period last year.

The processing and manufacturing sector received the highest capital at US$ 14.95 billion, accounting for 45.2 percent of the total. Electricity production and distribution and real estate attracted US$ 8.37 billion and US$ 2.5 billion respectively.

Japan was the leading investor amongst 112 investing countries, accounting for 27 percent of the total FDI at US$ 8.94 billion, followed by Korea and Singapore with a total registered capital of US$ 8.18 billion and US$ 4.69 billion.

Ho Chi Minh attracted the highest FDI with a total registered capital of US$ 5.68 billion, accounting for 17.2 percent of the total investment capital. Bac Ninh followed at US$ 3.28 billion, while Thanh Hoa province ranked third with a total registered capital of US$ 3.16 billion.

Need to do more

Going forward, Vietnam has to ensure that it moves away from a low labor cost economy to one focusing on technology and skilled labor. The government has to do more than just attract investments into high-value added activities. Vietnam should also focus on diversifying FDI sources, enabling domestic firms, and increasing investments in infrastructure.

Majority of the foreign investments in Vietnam are from Korea, Japan, and Singapore. Rather than been over-dependent on Asian countries, Vietnam has to promote itself further and increase investments from the EU, US, and other countries outside Asia-Pacific. With the EU-Vietnam FTA and the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP), Vietnam has an opportunity to increase investments from countries outside Asia.

Foreign firms in Vietnam are offered huge tax and other incentives such as exemptions or reductions in corporate income tax, import duties, and VAT. However, domestic firms that already lack the capital and technology of foreign firms are not provided any of those incentives, further hampering their growth. The government has to find a fine balance between providing incentives to domestic and foreign firms to improve competitiveness. To increase linkages, the government can incentivize foreign firms engaged with local firms, if it wants FDI to have a long and positive effect on the economy.

One key sector not mentioned in the draft is infrastructure. As the country progress and investments increase, infrastructure will play a crucial role in the economic development. Infrastructure projects, which are in dire need of funds in Vietnam cannot be fulfilled by the domestic sector and would require foreign capital. The government has to prioritize infrastructure projects and incentivize foreign investments to reduce the increasing gap between the current and needed investment levels. Infrastructure projects such as roads, railways, power grids, ports, and industrial parks should be a priority for the government going forward.

Once the draft is finalized by the Ministry of Planning and Investment, we will have further clarity regarding the scope of their strategy.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Myanmar Just Replaced Its Century Old Companies Law, This Is What You Need to Know

On December 6, 2017, Myanmar’s President U Htin Kyaw approved the new Myanmar Companies Act, 2017, replacing the country’s century-old Companies Act of 1914. The new law aims to change the way companies are regulated in the country. It will modernize company formation and management, and significantly revise corporate governance in Myanmar, bringing the country’s company legislation at par with international standards.

The Act was drafted by Myanmar’s Directorate of Investment and Company Administration (DICA) with technical assistance from the Asian Development Bank (ADB). It offers a wide range of regulations that are relevant to foreign investors and businesses operating in Myanmar. Some of these are discussed below.

Change in the definition of foreign companies

One of the most significant changes introduced in the Act is the new definition of foreign companies. In the old Companies Act of 1914, even a company with a one percent of its shares owned by a foreign investor was classified as a foreign company. To sustain the “local company” status, companies had to maintain a 100 percent local ownership, thereby largely restricting foreign investment in Myanmar’s domestic companies.

The new Companies Act allows foreign investors to hold up to 35 percent of shares in a domestic company without the company losing its classification as a “local company”. The change in the foreign company definition unlocks huge business potential in areas that were previously restricted to foreign investors, such as banking and finance. It authorizes foreign investors to trade in shares on the Yangon Stock Exchange,which was previously restricted to local companies.

Further, it is much easier for companies to transform its legal status from “foreign” to “local” or vice versa, without seeking prior approval from the regulator. The concerned domestic company only need to notify DICA, if it transforms its legal status to that of a foreign company, that is, if the foreign investors share in the company increases beyond the prescribed limit of 35 percent.

This effectively opens up Myanmar’s economy to foreign minority ownership and paves the way for more foreign investments.

Amendment to rules related to company administration 

Earlier, every company required a minimum of two shareholders and two directors for the incorporation of the company. The new Act reduces this requirement to a minimum of one shareholder and one director, allowing investors to make their Myanmar company a 100 percent owned subsidiary.

As per the new legislation, the director of the company need not be a Myanmar citizen, but must fulfill conditions to pass the “ordinary resident” status. In other words, she or he must be present in Myanmar for a minimum of 183 days in a year to qualify as the director of a company.

Further, the new Companies Act explicitly details the duties of corporate directors, including the duty regarding the use of position and use of information. It also details duty in relation to obligations of a company and duty to act with care and diligence.

Other important changes

Capital management: The Act allows more flexible capital structures and changes to share capital that will permit companies to raise or reduce capital with fewer procedural requirements.

Company registration process: Simplifying the application process for incorporation and registration of companies, the Act exempts investors from the need to obtain a trade permit from DICA. The change will significantly enhance the ease of doing business in Myanmar.

Protection to minority shareholders: Allowing for more flexibility in the organization of a company, the new legislation introduces more protection to minority shareholders. It empowers such shareholders to sue on behalf of the company, even if the directors of the company do not approve of the claims. Companies may also provide other instruments in their constitution that minority shareholders may use to further their interests.

Further, the law legally authorizes companies to carry on any business and activities, after obtaining a relevant license and therefore no longer need to define the objectives of the company in its Memorandum of Association.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

China’s Electric Vehicle Battery Producers Need To Overcome These Hurdles To Supersede Global Giants

The electric vehicle (EV) industry is just one priority area of the country’s ‘Made in China 2025’ industrial strategy, which aims to transform China from a low-end manufacturer to a high-end one. Yet, the government’s goals for the industry are staggering: its target is to have five million electric vehicles on its roads by 2020, up from one million today.

The battery industry’s success is closely tied to the EV industry’s success – a battery currently accounts for up to half an EV’s cost of production. Given the close relationship of the EV industry and battery industry, the government has picked domestic champions that it is promoting to lead the way in China’s domination of the global battery industry.

Fierce global competition in this industry is already under way as producers vie for their share of the what is predicted to be a US$25 billion global industry by 2020.

The competitive landscape

In previous decades, Japanese and South Korean producers, such as Japan’s Panasonic and South Korea’s LG Chem, dominated the battery industry. Panasonic is still the world’s largest supplier of EV batteries globally; it is currently building the so-called Gigafactory in Nevada, US, with US-based EV producer Tesla.

However, Chinese champions Build Your Dreams (BYD) and Contemporary Amperex Technology Co. Limited (CATL) have nearly caught up and are now two of the world’s top-five lithium battery makers. BYD, which is based in Shenzhen, is also a big player in the EV industry and is able to take advantage of the benefits of this vertical integration.

CATL, based in Ningde, is China’s fastest growing battery producer and had the capacity to produce 7.6 gigawatt hours (GWh) of batteries in 2016. Due to China’s big push, it is predicted that CATL will surpass Tesla’s ‘Gigafactory’ by 2020. Tesla has a target to produce at a capacity of 35 GWh by 2020, compared to 50 GWh for CATL and 12 GWh for BYD.

Other Chinese producers are also competitive. Lishen, based in Tianjin, has a target to produce 20 GWh by 2020. As well as expanding production domestically, CATL is also expanding its production abroad so that it is strategically located to do more business with foreign EV producers.

With large capital investments by battery producers, global battery production capacity has more than doubled to 125 GWh over the last three years. Analysts predict this figure to double again to over 250 GWh by 2020.

As Chinese battery producers, including CATL, BYD, and Lishen, continue their rise, and battery production shifts from Japan and South Korea to China, analysts expect China to go from currently producing 55 percent of global lithium batteries to 65 percent by 2021. It is quite clear that China recognizes the opportunities in the rapidly growing battery industry and does not plan to miss out on these opportunities.

Challenges for the domestic industry

While the battery industry has strong growth potential, it faces a number of challenges. Solutions and technologies to overcome these challenges will need to be developed if the industry is to be sustainable both in China and globally – this is a space where foreign manufacturers, suppliers, and consultants can collaborate.

Despite growing demand from the EV industry, there are production capacity concerns in China’s battery industry. As producers race to increase capacity and seize upon the opportunities presented by the EV market, there are overproduction concerns with 25 KWh batteries; the low-end segment of the market.

However, at the same time, there are underproduction concerns with the 75 KWh and 100 KWh batteries – the high-end segment of the market. Premium electric vehicles, such as Tesla vehicles, require the high-end batteries. High-end battery producers in the domestic market are in a strong position because they are faced with a high demand for their batteries.

To allow electric cars to go farther on a single charge, a critical factor for batteries is their energy density. For now, China lags behind South Korean producers in terms of the capabilities and technology to provide greater energy density, according to Bernstein analysts. The frontrunners in the market are LG Chem, Samsung SDI, SK Innovation, and Panasonic, with Chinese suppliers playing catch-up, the report says.

Many observers feel Chinese producers need to develop their technology and capabilities if they are to get the full attention of EV producers, especially foreign EV producers.

Separately, as the cost of the battery makes up a significant part of the cost of an EV, it is important to reduce the cost of the battery to make the EV industry competitive compared to conventional internal combustion engine (ICE) vehicles.

Due to advances in battery efficiency gained from developments in technology, significant progress has already been made by the industry, with global battery prices falling by roughly 80 percent (from US$1,000/KWh to US$227/KWh) between 2010 and 2016. Even at US$227/KWh, a 60 KWh battery is a US$13,620 component of a car. A 60 KWh battery is the typical sized battery used in an EV.

However, further reductions in battery prices will be required and the Chinese government is aware of this. A target to halve battery costs is among national 2020 targets. Based on current projections, battery prices could fall below US$100 KWh by 2030, which will mean some EV and ICE models will have price parity. That could be the start of a ‘tipping point’ for EV sales.

Even if EV models do have price parity with ICE models, there will be other obstacles that could prevent consumers from switching from ICE vehicles to EVs. These obstacles include the lack of EV charging infrastructure, the time taken to charge a battery, and the relatively low power density of batteries.

Moreover, the existing power density of batteries is about half of what is needed to sustain driving ranges of 400 kilometers, which many consumers want. One of the Chinese government’s targets is to improve energy by two-thirds by 2020.

China’s ambitious plans for both the EV industry and the EV battery industry mean that there are opportunities in China’s EV battery industry. However, if these opportunities are to come to fruition, and the industry is to be sustainable, the industry must overcome the challenges that it faces.

For China, the development of new technologies and the ability to produce high-end batteries will be of critical importance if it is to realize its ambitions to dominate the global EV battery market. It is in these areas where China can benefit the most from foreign investment.

 

Dezan Shira & Associates provide business intelligence, due diligence, legal, tax and advisory services throughout the Vietnam and the Asian region.

 

This column does not necessarily reflect the opinion of the editorial board or Frontera and its owners.

Why Bangladesh Scores Low on the Buffett Indicator?

The Buffett Indicator

Warren Buffett has long championed looking at market capitalization to GDP (gross domestic product) ratio when assessing a market. For Buffett, the “single best” way to tell if stocks are too expensive is to look at the total value of all equities in the market relative to the total size of the economy. Looking at the developing markets (EEM) (FM) in particular; markets such as China (FXI), India (EPI), Brazil (EWZ), and Russia (RSX) had Buffett indicators at 65.4%, 69.2%, 42.2%, and 48.5% (market capitalization of listed domestic companies to GDP ratio), respectively as of 2016. In comparison, developed markets such as the US, UK and Australia, had market cap to GDP ratios of 147.3%, 141.2%, and 105.3%, respectively.

Rahman sees the Buffett indicator rising to 40% for Bangladesh

Bangladesh lags far behind by the standards of this indicator with a 22% market cap to GDP ratio, Majedur Rahman, Managing Director of the Dhaka Stock Exchange told Frontera during a recent conversation. “Bangladesh’s GDP is about $250 billion, whereas its market capitalization is about $52 billion. Back in 2010, the market cap to GDP ratio was 40%. So, we’re pretty far behind compared to other South Asian markets,” said Rahman. He expects the Bangladeshi government’s focus and listing interest from the corporate sector to drive this ratio up to at least 40% in 3-5 years.

 

 

The Frontera interview with Majedur Rahman, Managing Director of the Dhaka Stock Exchange was conducted by Abraham Sutherland.

What Is Required to Boost The Share of Foreign Investment in Bangladesh Capital Market?

Foreign representation at Bangladesh capital market

Cross border investment flows have rebounded well post the financial crisis. From about $1.09 million in 2009, outward FDI (foreign direct investment) flows had reached a $1.47 million in 2016, according to data from OECD. Foreign investment has now come to play a key role for any economy’s capital market. However, when it comes to Bangladesh, the share of cross border capital into its stock market still remains dismal.

In a recent conversation with Frontera, Majedur Rahman, Managing Director of the Dhaka Stock Exchange said that foreign investment currently constitutes just 5-6% of the Bangladeshi capital market on a daily turnover basis. However, this is an improved figure over the less than 1% share that foreign money commanded at the DSE prior to 2013. A good part of this growth has been witnessed over the past one year.

Further privatization would be a boon for investment

Thomas Hugger, chief executive officer and founder of Hong Kong-based Asia Frontier Capital (AFC) believes that one of the reasons why foreign stakes in the Bangladeshi capital market remain low is because they “are not allowed to participate in the local IPOs (there are lotteries and if you manage to get shares the yields are substantial as pricing is normally too cheap).” Hugger further suggested, “Bangladesh should privatize some of its state holdings to local and foreign investors.”

Room for improvement

Hugger highlighted bureaucracy and a cumbersome IPO process, as reasons for the limited interest to date amongst local companies to publicly list on the Bangladeshi market.

A Decade of change

James Bannan, Frontier Markets Fund manager at Coeli Asset Management, sees massive improvement in terms of foreign representation in the Bangladeshi capital market. “When we started investing 10 years ago, foreigners were less than 2% of the market, and there was basically no sell side coverage and there was no data on Bloomberg.  From there to where we are today has been a massive improvement,” Bannan told Frontera.

Bannan highlighted stronger governance, improved transparency, and better corporate access as the key requirements towards increasing Bangladesh’s appeal to a broader investor base.

Bangladesh also scores low on the Buffett Indicator. Part 4 of this series sheds light on this.

 

 

The Frontera interview with Majedur Rahman, Managing Director of the Dhaka Stock Exchange was conducted by Abraham Sutherland.

Two Key Regulations To Be Passed On The Dhaka Stock Exchange Over The Next 6 Months

The Dhaka Stock Exchange: poised for a brighter future

Frontera recently spoke with Majedur Rahman, Managing Director of the Dhaka Stock Exchange where he shared his insights on reforms that are currently being undertaken to ensure a better capitalized future for this frontier market (FM) (BBRC).

There are currently only 3 main indices for the Dhaka Stock Exchange. These are as follows:

  1. The Dhaka Stock Exchange Broad Index (DSEX) is a broad market index, designed to reflect the broad market performance of the Bangladesh stock market. The index has a base date of Jan 17, 2008, and base value of 2951.91. Financials and textile sector companies dominate the DSEX.
  2. The S&P Bangladesh BMI Shariah Index is a Shariah-compliant benchmark covering large-, mid- and small-cap stocks of companies domiciled in Bangladesh. The healthcare sector commands a 43.7% weight in the index, followed by telecommunication services at 15.9% (as of October 31). The index has a base date of Jan 17, 2008, and base value of 1000.
  3. The Dhaka Stock Exchange 30 Index (DSE 30) represents 30 leading companies from the Bangladesh stock market. Together, these 30 blue-chip stocks account for around 51% of the total market capitalization of the Dhaka stock exchange. The index has a base date of Jan 17, 2008, and a base value of 1000. Pharmaceuticals, chemicals, and banks dominate this index.

Stocks such as BRAC Bank Ltd (DSE: BRACBANK), City Bank Limited (DSE: CITYBANK), Beximco Pharmaceuticals Ltd. (DSE: BXPHARMA) (BXP.L), Grameenphone (DSE: GP), IDLC Finance Limited (DSE: IDLC), LankaBangla Finance Limited (DSE: LANKABAFIN) figure amongst the top Bangladeshi stocks.

Two more offerings from the Dhaka Stock Exchange over the next 3 months

Rahman told Frontera that the Dhaka stock exchange is already in the process of adding two more offerings over the next 3 months, a bulletin board and an OTC (over-the-counter). This means the Dhaka stock exchange could soon see market makers and short sellers added to the list of participants. There is also the SME index which would allow small and medium-term enterprises to list. Initially, only qualified institutions would be allowed to trade in these stocks.

Two key regulations to be passed over the next 6 months

Currently, short selling is prohibited on the Dhaka stock exchange. The exchange is in talks with an organization to serve as a central counterparty to such transactions. Once that is in place (expected within the next 6 months), short-selling and day-netting may come sooner to this Asian stock market (EEMA) (VPL), than expected. Consequently, the DSE would have 2 regulations to pass:

  1. a securities lending and borrowing scheme, and
  2. regulation relating to short-selling and market makers

With the 3-phased development plan (see chart above) in place, the Dhaka Stock Exchange is on a clear maturation path.

Frontera also spoke to Rahman about the share of foreign investment and the Buffett indicator as pertains to the Bangladeshi market, which are covered in Part 3 and 4 of this series.

 

 

The Frontera interview with Majedur Rahman, Managing Director of the Dhaka Stock Exchange was conducted by Abraham Sutherland.